Two tax increases: cigarettes and banks

Washington’s Legislature had two tax increases in its budget, both of them small and finely targeted at unpopular interests: cigarette smokers and large banks.

The smokers’ bill, House Bill 2565 (Rep. Steve Kirby, D-Tacoma) is aimed at the customers of tobacco stores with roll-your-own cigarette machines. These places sell loose tobacco and paper tubes and rent a machine that makes them into smokes. Customers have been saving about half the cost of cigarettes because the tax on loose tobacco is less than the tax on cigarettes. H.B. 2565 makes the roll-your-own customers pay at the cigarette rate.

The bank bill, Senate Bill 6635 (Sen. Ed Murray, D-Seattle) imposes business-and-occupation tax on interest from residential first mortgages. It applies only to banks that have branches in at least 10 states—lenders such as Bank of America and Chase Bank.

Here is an odd thing about these two tax bills. Each of them, it seems to me, is vulnerable to a legal challenge. The bank bill singles out a class of out-of-state companies and taxes them differently than companies that are only in Washington or ones (like Washington Federal or Banner Bank) that have branches in two to nine states. This appears to violate the “dormant commerce clause” of the U.S. Constitution—that a state may not pass a law that improperly burdens interstate commerce. I asked Jim Pishue, president of the Washington Bankers Association, about that.

“There has been a question out there whether this is constitutional,” he said, adding that he didn’t know if any of his members would pursue it.

The possible legal challenge to the roll-your-own bill is that the vote in the Senate was 27-19, which is less than two-thirds. And Tim Eyman's Initiative 1053, passed in 2010, requires a two-thirds’ vote of both houses to pass a tax increase. The bill has been described as a tax reclassification rather than in increase but that’s a dodge. It’s a tax increase.